Taking Stock: Northern Trust, BlackRock Say Little Changed

Taking Stock: Northern Trust, BlackRock Say Little ChangedPrinter Friendly Email Reprints Reader Comments Share | August 8, 2011Tom Steinert-ThrelkeldAs securities markets in the United States prepare to open widely lower Monday morning, Northern Trust and BlackRock each said that the decision by the Standard & Poor’s bond ratings agency to downgrade U.S. Treasury debt for the first time would not affect their views of the U.S. bond market or the solvency of the U.S. government.Like what you see? Click here to sign up for Securities Technology Monitor's weekly newsletter to get the latest news and analysis that matters to the effective operation of capital markets.Chief Investment Officer Bob Browne said Northern Trust has no plans to sell U.S. Treasuries as a result of the downgrade.“Northern Trust does not see any fundamentally new information in the downgrade about the state of the U.S. economy and the country’s capacity to pay its debt,” said Browne.Using credit default swaps as a guide, U.S. beats Wal-Mart.Underscoring Mr. Browne’s position, Northern Trust’s Chief Investment Strategist, Jim McDonald, last week released a research commentary in which he analyzed the deal to raise the government debt ceiling and the political environment that created it. McDonald noted that U.S. fiscal problems, if left unaddressed, were likely to manifest themselves through a weaker dollar rather than higher bond yields. The U.S. government’s financial strength still remained higher than that of almost any other nation and of major corporations, including Wal-Mart (see chart).Northern Trust investment experts believe that growth and inflation expectations will determine U.S. bond yields over the next few years much more than the level of deficits.“Looking globally, S&P downgraded Japan to AA- in January of this year; that country's bond yields have declined since then and remain substantially below those of the United States," Browne said.With regard to money market funds, Browne noted that short-term ratings of the U.S. remain unchanged by S&P, remaining at A1+, the highest level. A Northern Trust report can be found here.BlackRock, in a statement, said the downgrade of U.S. sovereign credit by S&P“reflects facts that have been well known to the market for some time. So, it does not imply a fundamental increase in risk, and we don’t believe that investors should change their behavior based solely on the downgrade. However, in combination with continued economic weakness and regulatory uncertainty, this may provide a signal to some investors to reassess their risk appetite.”BlackRock said it had been preparing for the possibility of downgrade over the past month, and, the firm has no need to execute any “forced selling of securities” in response to the S&P downgrade.BlackRock said it also is prepared for “continued downgrades into next week of the many other issuers and issues that derive their rating from the U.S. government rating – including governmental entities and corporate issues.Weakness in labor markets, when combined with only modest levels of growth, argues for a high likelihood that the Federal Reserve will maintain its Fed Funds policy range at historically accommodative levels for at least another year and perhaps through 2012, BlackRock said.BlackRock said:Nonetheless, we think it is vital to underscore the fact that the U.S. Treasury sector remains the largest and most liquid fixed income market in the world with the greatest degree of price transparency and few genuine alternatives.As securities markets in the United States prepare to open widely lower Monday morning, Northern Trust and BlackRock each said that the decision by the Standard & Poor’s bond ratings agency to downgrade U.S. Treasury debt for the first time would not affect their views of the U.S. bond market or the solvency of the U.S. government.

Chief Investment Officer Bob Browne said Northern Trust has no plans to sell U.S. Treasuries as a result of the downgrade.

“Northern Trust does not see any fundamentally new information in the downgrade about the state of the U.S. economy and the country’s capacity to pay its debt,” Browne said.

Using credit default swaps as a guide, U.S. beats Wal-Mart.

Underscoring Browne’s position, Northern Trust Chief Investment Strategist Jim McDonald last week released a research commentary in which he analyzed the deal to raise the government debt ceiling and the political environment that created it. McDonald noted that U.S. fiscal problems, if left unaddressed, were likely to manifest themselves through a weaker dollar rather than higher bond yields. The U.S. government’s financial strength still remained higher than that of almost any other nation and of major corporations, including Wal-Mart.

Northern Trust investment experts believe that growth and inflation expectations will determine U.S. bond yields over the next few years much more than the level of deficits.

“Looking globally, S&P downgraded Japan to AA- in January of this year; that country's bond yields have declined since then and remain substantially below those of the United States," Browne said.

With regard to money market funds, Browne noted that short-term ratings of the U.S. remain unchanged by S&P, remaining at A1+, the highest level.

BlackRock, in a statement, said the downgrade of U.S. sovereign credit by S&P “reflects facts that have been well known to the market for some time. So, it does not imply a fundamental increase in risk, and we don’t believe that investors should change their behavior based solely on the downgrade. However, in combination with continued economic weakness and regulatory uncertainty, this may provide a signal to some investors to reassess their risk appetite.”

BlackRock said it had been preparing for the possibility of downgrade over the past month, and, the firm has no need to execute any “forced selling of securities” in response to the S&P downgrade.

BlackRock said it also is prepared for “continued downgrades into next week of the many other issuers and issues that derive their rating from the U.S. government rating – including governmental entities and corporate issues.

Weakness in labor markets, when combined with only modest levels of growth, argues for a high likelihood that the Federal Reserve will maintain its Fed Funds policy range at historically accommodative levels for at least another year and perhaps through 2012, BlackRock said.

BlackRock said: "Nonetheless, we think it is vital to underscore the fact that the U.S. Treasury sector remains the largest and most liquid fixed income market in the world with the greatest degree of price transparency and few genuine alternatives."